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Hofeller v. Federal Trade Commission


March 25, 1936


Petition for Review of Order of the Federal Trade Commission.

Author: Evans

Before EVANS and SPARKS, Circuit Judges, and BRIGGLE, District Judge.

This appeal is from an order of the Federal Trade Commission directing petitioner to cease and desist unfair trade practices, viz., the selling in interstate commerce to concessionaires, of candy so packed as to be a lottery or gift enterprise. Because of the importance of the findings of the Federal Trade Commission, we have set forth the findings of said commission, deleting the immaterial portions.*fn*

EVANS, Circuit Judge.

Briefly stated the facts are:

Petitioner sells candy in packages which retail for five to twenty-five cents and contain various prizes ranging in value from one cent to three dollars. The consumer in purchasing a package does not know which prize he will receive nor its value. The packages are generally sold in burlesque theatres, at carnivals, and like places, where "straight" candy is not generally sold, but the Commission found that the potential competition of "straight" candy was eliminated by the sale of this prize candy. It also held that the sale of prize candy injuriously affected the business of the straight candy dealers and constituted unfair competition, and violated section 5 of the Federal Trade Commission Act (15 U.S.C.A. § 45).

Petitioner argues that (1) the complaint is insufficient to show unfair methods of competition upon which a valid cease and desist order might be predicated, (2) there was no tendency to suppress substantial competition, exploit or deceive the public (most all of the consumers not being children), and (3) the Federal Trade Commission Act is unconstitutional if it be construed to cover practices not deemed unfair at the time of its adoption.

The instant case is controlled by Federal Trade Commission v. R. F. Keppel & Bro., 291 U.S. 304, 54 S. Ct. 423, 78 L. Ed. 814. Petitioner agrees that his appeal turns upon the applicability or non-applicability of the Keppel Case. He differentiates the Keppel Case on the ground that sales to children were there the determining factor, but were here absent. It, too, was an unfair competition case involving the sale of prize candy, the sale being most generally to children.

This court followed the Keppel Case, in a recent opinion, Walter H. Johnson Candy Co. v. Federal Trade Commission, 78 F.2d 717, where we upheld a cease and desist order dealing with the sale of a prize lottery scheme in connection with the sale of candy, mostly to children.

It cannot be denied that the persuasive argument in the Keppel Case was based on the fact that the consumers of the candy were, in the main, children. We are not satisfied, however, that the conclusion there reached is not here applicable. It will be noted that the Supreme Court emphasized the factor of lottery and chance in determining what constituted an unfair method of competition, and it spoke in general terms, at times without limitation to instances where the consumers were children. The practice there disclosed was deemed offensive to some manufacturers who refrained from adopting it and therefore suffered loss. In the Keppel Case there are many facts indicative of unfair trade methods there pointed out by the court which are present in the instant case. Among such similarities are: Inferior candy sold in the prize packages; a relatively negligible amount of the candy was given in return for the price; substantial diversion of trade from actual or potential competitors; sale of the candy with the lottery feature in violation of local law; and competing manufacturers damaged by refraining from such practices.

It is quite impossible to escape the conclusion that where a competitive method employs a device whereby the amount of the return is made to depend upon chance, such method is condemned as being contrary to public policy.

Two matters in this field of law are well settled: (a) What constitutes unfair methods of competition is a question of law for the court. Federal Trade Commission v. Balme (C.C.A.) 23 F.2d 615; Federal Trade Commission v. Raladam Co., 283 U.S. 643, 51 S. Ct. 587, 75 L. Ed. 1324, 79 A.L.R. 1191; James S. Kirk & Co. v. Federal Trade Commission (C.C.A.) 59 F.2d 179; Federal Trade Commission v. Gratz, 253 U.S. 421, 40 S. Ct. 572, 64 L. Ed. 993. (b) The findings of the Federal Trade Commission are to be accepted if supported by evidence. Armand Co. v. Federal Trade Commission (C.C.A.) 78 F.2d 707; E. Griffiths Hughes, Inc., v. Federal Trade Commission (C.C.A.) 77 F.2d 886; Federal Trade Commission v. Curtis Pub. Co., 260 U.S. 568, 43 S. Ct. 210, 67 L. Ed. 408. The statute provides:

"* * * The findings of the commission as to facts, if supported by testimony, shall be conclusive." (15 U.S.C.A. § 45).

The issue is therefore narrowed to whether there was evidence to support the findings of the Commission and, if so, whether the facts found were such as to fall within the purview of the legal conception of "unfair methods of competition." As the Supreme Court has interpreted that phrase, the dominant factor seems to be the element of competition, actual or potential, and the specificity and substantiality of the effect of such unfair methods upon such competition.

Our study of the record has caused us to reach this conclusion. Although we do not find the evidence overwhelmingly establishes either the presence of substantial existing competition, or of potential competition between the sale of straight candy and the novelty candy here under scrutiny, there is sufficient evidence to sustain the findings of the Commission. The testimony tended to disclose that in the field of burlesque theatres, free open air shows, carnivals, show boats, and the like, the sale of prize or novelty candies constituted a very substantial, if not a major, part of the receipts from candy sales and that little other candy was sold in such places, except bar candies. There was testimony which tended to show that the distributors of straight candy were deprived of possible business. They either refrained from entering that sort of business because of moral compunctions, or they were unable to compete with the prize candy business because of the appeal of the lottery features. It was also shown that the candy in the prize package was much inferior in quality to straight candy; that the quantity given was negligible in view of price charged; and that the prizes often varied greatly in value. The profit on these packages exceeds 50%.

We are of the opinion that the present investigation was begun in the interest of the public for the protection, encouragement, and maintenance of competition and for the elimination of unfair trade methods involving the use of lottery and methods generally held by the community to be contrary to public policy. There was evidence to the effect that 60% to 70% of the receipts from the free shows was from the sale of this novelty candy; 35% to 50% of show boat receipts resulted therefrom; and 30% to 35% of tent show receipts was from novelty packages. 95% of petitioner's business was in the sale of prize packages. Although complete evidence was lacking, it was sufficient to show that the prize candy industry is a substantial industry.

The order is affirmed.

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